I’m an investor with New Atlantic Ventures, where I help launch early-stage companies that have new technologies and new takes on how to win in business. I’m inspired every time entrepreneurs prove there’s a better way to solve big problems, make life better or disrupt comfy clubs. I'm skeptical, however, when start-ups get too trendy or raise too much money before the business is proven. Before becoming an investor, I had a great run building Boston Consulting Group’s Technology, Media, and Telecommunications Practice. Away from work, I ski, mess around in boats, spoil my grandchildren, and tinker with digital toys.

The Money Source Entrepreneurs Often Overlook

Corporate venture capital has been quietly reborn over the last ten years. Corporate VCs were dinged, justifiably at times in my experience, for naive investments, narrow agendas, passivity, and fickle decisions. For this reason entrepreneurs often look on them as opportunistic money, not true investment partners.

Things have changed.

Corporate venture capital is a rising share of total venture capital. This reflects both the fund-raising challenges that many independent venture funds have faced, leading to smaller funds, and development by many corporations of a new, seasoned appreciation of the role of venture investments. During the bubble corporations often came to the party because everyone was having lots of fun. Then the fun ended. Now corporations see venture investment as a way to be in touch with the powerful innovation drivers that the start-up community taps: e.g., mobile, social, cloud, and the digitization and software-ingestion of everything*. They want to see and understand what is happening, actively look for a way to incorporate it into their business systems, and have an option to acquire if it makes sense.

Data via National Venture Capital Association (nvca.org)

Corporate venture investors now resemble venture funds in their approach, to a much greater degree. They have often hired professionals with backgrounds in venture funds and successful venture-backed companies. They take board seats and take on the full responsibility of board members. They are sophisticated about managing the interaction between their corporate agendas and the interests of the start-up: the issue is still there, but it’s honestly on the table and the corporate investor is comfortable stepping out of the room if the company needs to strategize its own interests. They understand that, if they take a major place in the cap table of the company, then the company counts on them to see the investment through, and they try to do that, even if the corporation reorganizes or faces challenges in its base business. The one problem that seems to persists is in-house legal counsel who sometimes lack perspective on typical start-up issues and bring an inflexible attitude, but this can be managed.

Corporate investors are likely to become strategic partners. This is not a change, but it’s important. Most corporate investors vet start-ups for strategic relevance before they invest. An equity stake gives the investment sponsor a lever that s/he can use to get attention from operating managers in the company, to get them to sign up for and execute partnership deals. This can be very useful to access customers and sales forces or data and APIs that are not otherwise available. I’ve seen creative performance warrant deals done that increase this leverage and can be powerfully win/win. Why not give a partner a chance to earn 5% of the equity if they double the size of the business, and hence roughly double its value? Priceline.comPriceline.com was catapulted to early success by a performance warrant deal with Delta.

A lot of start-ups never raise strategic money. In many cases this is appropriate, but I think in some cases entrepreneurs do not consider how much the value proposition of corporate venture investors has improved. Across a range of situations, I’m generally quite happy with the role and value add of my corporate co-investors. It’s a good time to look again.

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